Anyone keeping an eye on where mortgage rates are headed should pay close attention to the monthly Canadian and U.S. employment reports because the cost of labour is one of the main drivers of overall inflation. Bond yields, and by association mortgage rates, move in response to changes in expectations of future inflation.

The employment data have even greater importance today because the U.S. Federal Reserve has linked both the timing of its quantitative easing (QE) tapering and the timing of its next short-term policy rate increases to the U.S. labour market’s return to health. Any changes in U.S. interest rates have a direct impact on Canadian rates because our monetary policies are tightly linked.

We received the latest Canadian and U.S. employment data (for March) last Friday and today’s post provides highlights from both.

Canadian Employment Data Highlights

The Canadian economy added 42,900 new jobs last month, almost double the 22,500 new jobs the market was expecting. This continues the roller-coaster trend we have seen of late where there is a net decline in jobs one month and a net increase the following month.

We have now averaged roughly 16,000 new jobs over the most recent twelve months and approximately 10,000 new jobs over the most recent six months. These data indicate a slow decline in our employment momentum, which isn’t even tracking in line with the 20,000 or so new jobs we need to create each month to keep pace with the ongoing growth of our labour force.

Most of last month’s gains were in youth-focused part-time work (30,100 new part-time jobs for the month) and in public sector hiring (39,300 new public-sector jobs for the month). That type of job creation does not equate with the kind of longer-term income growth that it will take to get our economy humming again.

Further to that point, the service sector added 58,500 new jobs while goods-producing employment shrank by 15,600 jobs and manufacturing employment shrank by 9,200 jobs. This disconnect is concerning because manufacturing jobs create a powerful multiplier effect, which triggers job creation across our broader economy. Manufacturing jobs also tend to be higher paying.

Average hourly wages did manage to eke out a small 0.2% gain for the month, which marked a 2.2% year-over-year increase over the most recent twelve months. That’s higher than our inflation growth of 1.1% over the same period (as measured by our Consumer Price Index), but not by enough to fuel a significant uptick in consumer spending or to materially alter inflation-growth forecasts.

U.S Employment Data Highlights

The U.S. economy added 192,000 new jobs in March, which was basically in line with market expectations; 184,000 of the new jobs were in full-time positions.

The initial job growth estimates for January and February were also revised upwards by 37,000 jobs in total, implying marginally higher job-growth momentum in those months as well.

The U.S. economy has averaged approximately 183,000 new jobs over the most recent six months. While that is above the 150,000 new jobs that it must create in order to keep pace with the growth of the U.S. labour force, it indicates that the “significant” slack in the U.S. labour market that still concerns U.S. Fed Chair Janet Yelen is being absorbed at a very slow rate.

The U.S. economy finally recovered all of the private-sector jobs that had been lost since the start of the Great Recession, taking roughly six years to reach that milestone.

Average hours worked rose from 34.2 hours/week to 34.5 hours/week. This is a big jump, which economist David Rosenberg estimates is equivalent to the creation of one million new jobs. The sharp increase in hours worked fuelled a 0.5% increase in average earnings for the month, while actual pay rates remained flat, at least for now. If this trend continues, employers will have to create more jobs instead of relying on their existing workers to work longer hours.

Five-year Government of Canada (GoC) bond yields rose by four basis points last week, closing at 1.75% on Friday. Market five-year fixed rates are still available in the 2.84% to 2.99% range, and five-year fixed-rate pre-approvals can still be had at rates as low as 3.09%.

Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%.

The Bottom Line: The big headline gain in the latest Canadian labour force survey didn’t pass the smell test once the report details were more closely examined. That helps explain why our bond yields actually fell on Friday after the report was released. The U.S. employment data were more encouraging, but not to a degree that should alter long-term views about the pace of the U.S recovery. From a mortgage-rate perspective, neither release alters my view that our ultra-low mortgage rates should continue for some time to come.